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With Fossil Fuel Plants Overvalued, It’s Time to Get Capacity Right

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Advanced Energy Perspectives is AEE's blog presenting news, analysis, and commentary on creating an advanced energy economy. 

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  • Apr 25, 2022
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Grid operators today are managing a changing portfolio mix while facing new system reliability challenges, such as extreme weather events occurring with greater frequency. As the clean energy transition accelerates, it’s vital that grid operators accurately understand how much they can count on different generating resources. They do so by evaluating the resource adequacy, or capacity value, of the resources available to determine how to meet total demand. But what happens when those methods of valuing capacity overlook certain outage risks? Some generating resources gain more reliability credit than they deserve. That is indeed happening with conventional power plants (coal, oil, and natural gas), which may be overvalued by as much as 20% under traditional methods. As new analysis commissioned by AEE shows, it’s time to get capacity right.

What makes it important to get these capacity value calculations right? There are major implications for how we manage risks to the electric grid and compensate for reliability contributions from various resources. It becomes even more pressing as a combination of cost declines, state policies, and consumer preferences lead to advanced energy technologies like wind, solar, energy storage, and distributed energy resources not only increase their presence on the grid alongside conventional technologies but even replace them.

As these new energy sources entered the market, regional system operators and market participants created methods to calculate capacity value based on their particular operating characteristics. Resource adequacy methods applied to thermal energy sources (coal, oil, and natural gas), however, have not kept pace. Long-existing methods for accreditation of the capacity value of fossil fuel-based generating resources are now fundamentally different than the more sophisticated new methods applied to advanced energy sources (renewables, battery storage).

A new technical report, “Accrediting Resource Adequacy Value to Thermal Generation,” prepared for AEE by Astrapé Consulting, and an accompanying AEE white paper, “Getting Capacity Right” (both available here), explore how the accreditation methodologies applied to thermal generation resources account for – and especially, overlook – outage risks such resources face. As these papers show, putting in place methodologies that consider more types of outage risks would:

  • improve incentives for all generators to improve their accredited value,
  • create new incentives for demand response and flexible load to enter the market,
  • send a signal for inefficient and poor performing thermal generators to retire, and
  • create a more accurate and fair accreditation process.

If you don’t have the “capacity” to dig into the report or white paper just yet, we have the essentials covered here.

Capacity Markets Explained      

Let’s work our way through the wonk: Our electricity system relies on a portfolio of many generating resources. System planners use a “reserve margin” to determine how much capacity (measured in MW) is needed to meet peak electricity demand from customers across their service territory. The energy market fulfills that demand day to day and in real time.

Some regional grid operators, such as ISO-New England, NY-ISO, and PJM, added capacity markets as a tool to ensure they have enough resources at their disposal to meet future levels of demand. Capacity markets competitively procure resources needed to meet resource adequacy requirements from resources that bid in auctions to be included in the portfolio for a future year of operation (typically three years later). Generators and non-generating resources like demand response and energy efficiency that clear the auction receive capacity payments in exchange for their commitment to be available in the specified delivery year.

The value of a generator’s capacity depends on how it performs and how it is accredited. A generator’s “nameplate capacity” tells us the highest possible level of production that the resource can reach, but no unit runs at that maximum output level 100% of the time. A system operator uses accreditation methods to answer: how much capacity can we reasonably rely on from a generating unit? The answer to that question results in a discount from nameplate, and determines the amount of capacity the generating unit can actually offer for sale in a capacity market.

Different Methods for Different Resources

Since advanced energy resources have different operating characteristics than conventional thermal resources, significant attention has been dedicated to establishing accreditation methodologies and performance metrics specifically for these variable technologies. These newer methods were design to assess advanced technologies’ resource adequacy comprehensively, accounting for multiple sources of uncertainty and outage risks.

The typical approach to accredit thermal resources, by contrast, has not been meaningfully re-examined or modified in years. Traditional accreditation for fossil fuel resources still assumes that a thermal generator’s performance is completely independent of other sources, with no outages correlated with similar units. (In other words it assumes that if one power plant is out of service, no other similar plant is offline at the same time.) And unlike the accreditation process applied to renewables and battery storage, thermal accreditation does not incorporate many weather impacts. That omission could overlook realistic outages that could affect similar units, thereby over-crediting them. Advanced energy resources face higher scrutiny, which discounts their capacity value. Different sources are simply not assessed on a level playing field.

But what if they were? The Astrapé team examined the methodology used to accredit thermal generating resources and compared it to the accreditation for advanced energy sources. The research team constructed a model using actual demand and generation data from the PJM South Region, as well as data from extreme weather events. They modeled thousands of simulated outages to replicate grid conditions. This enabled them to observe outages above the average outage threshold, as well as the prevalence of correlated outages.

The team investigated the effectiveness of the two prevalent accreditation methods using distinct areas of outage uncertainty and risk for both winter and summer scenarios. During intense hot and cold weather events, demand for electricity climbs significantly while extreme temperatures can impair a generating unit’s equipment. The analysis found that outages associated with these extreme weather events can undermine resource reliability of thermal units, especially when temperatures drop to extremely low levels. In this way, thermal resources may be over-accredited by as much as 20% in winter, 10% in summer.

Leveling the Capacity Playing Field

Precise adjustments to capacity accreditation require further study and analysis, but the report clearly demonstrated that standard thermal methodology overlooks known outage risks. The report also illustrated a range of adjustments to the traditional thermal accreditations that would appropriately account for these risks.

Some of the risks unaccounted for in thermal unit accreditation are already covered in reserve margin requirements, but that raises other concerns. This shifts the cost of those risks to customers (who pay the costs of all capacity acquired to meet total demand), rather than assigning the risks to generators by adjusting their capacity value.

Appropriately allocating the risk back on the generators would improve incentives for generators to take steps to improve their accredited value (adding storage, improving weatherization, obtaining firm fuel supply, etc.). It would also create new incentives for demand response and flexible load to enter the market and, critically, send a signal for inefficient and poor performing thermal generators to retire, all of which can lower the total costs customers must pay for capacity. That retirement signal, in particular, has been absent from existing capacity markets.

The findings do suggest that existing resource adequacy and capacity accreditation methodologies should be carefully reviewed and revised to ensure that they adequately consider all relevant uncertainties. Given that new methodologies now applied to renewables, energy storage, and similar technologies account for unavailability more comprehensively, failure to revisit the methodologies applied to thermal resources may result in undue discrimination against advanced energy resources in RTO centralized capacity markets. AEE plans to apply fresh focus to the accreditation methods and advocate for fair, accurate treatment of all resources.

Download 'Getting Capacity Right' & Technical Report

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